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Question: What was the outcome of the trading relative to each objective?

25 Sep 2024,11:55 AM

 

Report Instructions:

 

Your team is assigned both short-term and long-term trading objectives. Based on the primary and secondary objectives, your team is invited to help clients to form and implement the strategy in achieving their specific objectives. At the end of the project, your team is required to submit a report and present it to the management team. The report needs to address the issues faced by the client as mentioned in the case, covering at least the following aspects:

  1. Outline the trading strategy that you planned to achieve the objectives.
  2. Explain the transactions you made.
  3. Analyse the profit and loss of your trading.
  4. Trading reflection.

For the primary objective, you are expected to explain the specific trading strategies you used in detail, demonstrate the currencies you buy or sell to achieve your trading objective and the quotation you accept for implementing the trading strategy. In addition, you could also explain the transactions that contribute to achieving the trading objective.

The secondary objective is linked with your stage 1 individual market view. Based on the individual market views each member of your team has completed in Stage 1, develop a market outlook and provide the Forex trading strategies you intend to undertake. Given your views (developed in Stage 1) about current and future market conditions, you (as a team) should devise a trading objective and strategy that you will try to implement. Strategies will specify how you will go about achieving your objective in a way that benefits your corporations – which currencies you will buy or sell. Where appropriate you should also devise a speculation strategy that will allow you to create a portfolio of currencies that will enable your organisation to take advantage of your predicted changes in the exchange rates.

In the trading reflection, you are required to reflect on the experience of each member of the team during the trading. What was the outcome of the trading relative to each objective? What could you have done differently? How does this experience shape your view about the determinants of foreign exchange you have analysed?

The strategies and strategy implementations are critically important components of the report. For this stage, you will present a consolidated team report including your portfolio summary and profit/loss.

DRAFT/STUDY TIPS

Introduction

Foreign exchange (Forex) trading represents one of the largest financial markets globally, where currencies are traded to achieve financial gain or hedge against risks. In this report, we outline the trading strategies our team adopted to meet both short-term and long-term objectives for our client. Our short-term objectives focused on achieving immediate profits by taking advantage of daily market fluctuations, while our long-term goals involved managing a portfolio of currencies to capitalize on long-term economic trends and geopolitical developments.

The essay begins by discussing our primary and secondary objectives, detailing the specific strategies employed in Forex trading. We then examine the transactions made, analyze the outcomes in terms of profit and loss, and reflect on our trading experience. Additionally, we explore how the experience has shaped our understanding of foreign exchange determinants, offering insights into what worked well and areas for improvement.

The thesis of this essay is: "By utilizing a combination of short-term technical analysis and long-term fundamental analysis, the team was able to implement a diversified Forex trading strategy that addressed both immediate and future objectives, yielding mixed results in terms of profitability, which provided valuable insights into risk management and market behavior."

1. Overview of Trading Objectives

Our trading approach was driven by two primary objectives: short-term and long-term. These objectives were crucial in shaping the strategies we adopted and influenced the type of currencies, market conditions, and trading techniques we employed.

Primary Objective: Short-Term Trading

The primary objective was to generate profits by leveraging short-term price fluctuations in the Forex market. To achieve this, we focused on day trading and scalping, both strategies that rely on quick decisions based on real-time market conditions. These methods involve entering and exiting trades within the same day, often within minutes or hours, to capitalize on small price movements.

Short-term trading required us to closely monitor market signals, economic reports, and real-time news updates, such as interest rate changes, political developments, or major company announcements that could impact currency values. For instance, during times of significant market volatility, such as during Federal Reserve interest rate decisions, we aimed to capture sharp movements in currency pairs like the USD/EUR or GBP/JPY.

Secondary Objective: Long-Term Trading

The secondary objective focused on creating a long-term strategy designed to take advantage of broader economic trends and geopolitical events. This involved holding currency positions for extended periods, sometimes weeks or months, based on fundamental analysis. Key indicators included inflation rates, unemployment levels, GDP growth, and central bank policies. The long-term strategy required a deep understanding of macroeconomic conditions and global events.

For instance, we speculated that rising inflation in the U.S. would lead the Federal Reserve to increase interest rates, potentially causing the U.S. dollar to appreciate relative to other currencies. Therefore, we formulated a strategy that would benefit from holding long positions in USD against currencies with weaker economic outlooks, such as the Japanese yen (JPY) or euro (EUR).

2. Trading Strategy: Primary Objective

To achieve our short-term trading objectives, we implemented a robust strategy based on technical analysis and high-frequency trading techniques. The primary focus was on scalping and day trading, where we aimed to enter and exit positions quickly to capture small price movements.

Scalping Strategy

Scalping involves making numerous trades throughout the day to capitalize on very small price changes. The strategy relies on high liquidity and volatile currency pairs, as these allow for quick movements that traders can exploit. The currency pairs we targeted included:

  • EUR/USD: This pair offers high liquidity and volatility, making it ideal for scalping.
  • GBP/JPY: Known for its volatility, the GBP/JPY pair presented opportunities for larger price swings, which we sought to capture during periods of economic uncertainty or political instability in the UK or Japan.

For our scalping strategy, we employed technical indicators such as the Moving Average Convergence Divergence (MACD) and Bollinger Bands to identify potential entry and exit points. MACD helped us determine the trend direction, while Bollinger Bands highlighted periods of low and high volatility.

For instance, on July 15, 2023, following the release of a weak GDP growth report for the eurozone, the EUR/USD pair showed increased volatility. We used Bollinger Bands to identify a temporary price contraction, followed by an expansion where we entered a short position, selling EUR and buying USD. The trade was closed within a few hours, with a profit margin of 0.5%, capitalizing on the immediate drop in EUR value.

Day Trading Strategy

In contrast to scalping, day trading involves holding positions for several hours but still within the same day. Our day trading strategy relied heavily on momentum trading, where we used price momentum to determine the strength of a market trend. Currencies like the AUD/USD pair were frequently traded due to the impact of commodity prices (especially gold and iron ore) on the Australian dollar.

For example, during a major announcement from the Reserve Bank of Australia in August 2023 regarding potential interest rate hikes, we identified an opportunity in the AUD/USD pair. The news resulted in a bullish sentiment toward the AUD, and we entered a long position in anticipation of further gains. We held the position for several hours until the market sentiment started to shift, locking in a profit of 1.2%.

Quotation and Execution

The quotation process for our short-term trades was critical, as it allowed us to assess bid-ask spreads and ensure we entered trades at favorable prices. We utilized a trading platform that provided real-time quotes and access to deep liquidity pools. One challenge we faced was slippage, where the price at execution differed slightly from the quoted price due to rapid market movements. To mitigate this, we used limit orders to ensure that trades were executed at predefined prices.

3. Transactions Made: Primary Objective

The transactions executed for the short-term trading objective involved a combination of buy and sell orders across different currency pairs. Here, we provide a detailed breakdown of some key trades made during the project.

Example 1: USD/EUR Short Position

On June 10, 2023, following the European Central Bank's (ECB) announcement of continued economic stimulus measures, we anticipated a depreciation in the euro. Our strategy involved short-selling EUR and buying USD. The EUR/USD pair was trading at 1.0985 at the time of the trade, and we executed a short position with a stop-loss set at 1.1020 to manage risk.

We monitored the market closely, and within hours, the euro depreciated further, reaching a low of 1.0930. We closed the position at this point, locking in a profit of approximately 50 pips.

Example 2: GBP/JPY Long Position

On July 20, 2023, political tensions in Japan and favorable economic reports from the UK led us to take a long position in the GBP/JPY pair. The pair was trading at 155.30, and we anticipated that the uncertainty in Japan would weaken the yen relative to the pound.

Using technical indicators, we identified an upward momentum in the pair and entered the trade. Over the course of the day, the pair reached a high of 156.10, and we closed the trade, earning a profit of 80 pips.

Example 3: AUD/USD Day Trade

On August 3, 2023, the Reserve Bank of Australia's announcement caused a sharp spike in the value of the AUD. We entered a long position in AUD/USD at 0.6950, anticipating further appreciation due to the positive economic outlook.

As the pair climbed to 0.7030, we closed the position within the same day, yielding a profit of 80 pips. However, we set a trailing stop to protect against sudden reversals, which proved effective when the pair started to decline after reaching its peak.


4. Profit and Loss Analysis: Primary Objective

The success of our short-term trading strategy can be evaluated through a detailed analysis of profits and losses incurred during the trading period. Our short-term trades were designed to capitalize on immediate market movements, and overall, they yielded positive results. However, there were several instances where losses occurred due to market volatility and unforeseen events.

Successful Trade: EUR/USD Short

The short position on EUR/USD, initiated after the ECB's announcement, was one of our most successful trades. The trade yielded a profit of approximately 50 pips, and the overall return on the trade was 0.45%. This success was largely due to the precise timing of our entry, which aligned with the market sentiment of euro depreciation following the ECB's dovish stance.

Successful Trade: AUD/USD Day Trade

Our day trade on AUD/USD also resulted in a notable gain, with a profit of 80 pips. The decision to enter this trade was based on strong fundamental analysis, as the Reserve Bank of Australia’s policy announcement fueled positive sentiment for the AUD. The use of a trailing stop helped us lock in profits while protecting against any sudden market reversals.

Loss Example: GBP/JPY Short

One of our trades that resulted in a loss was a short position on the GBP/JPY pair on July 25, 2023. We anticipated a decline in the pound due to uncertainty surrounding Brexit negotiations. However, unexpected positive news from the UK government caused the pound to rally, moving against our position. The trade was closed with a loss of 60 pips.

Upon reflection, this trade highlighted the importance of incorporating geopolitical risk factors into our decision-making process. Our failure to account for the potential for sudden political developments contributed to the loss.

Risk Management Techniques

Throughout our short-term trading, we employed various risk management tools, including:

  • Stop-Loss Orders: These were placed to automatically exit trades if the market moved against our positions beyond a certain threshold.
  • Position Sizing: We limited the size of each trade to ensure that potential losses remained manageable and did not exceed a predefined percentage of our total capital.
  • Diversification: By trading multiple currency pairs, we diversified our risk across different markets, reducing the impact of a loss on any one position.

 

5. Trading Strategy: Secondary Objective

Our long-term trading strategy was designed to capitalize on broader macroeconomic trends and shifts in global geopolitical dynamics. This strategy involved holding positions for longer periods, ranging from weeks to months, and was rooted in fundamental analysis. We employed several techniques to meet our long-term objectives, including carry trades and hedging strategies.

Fundamental Analysis

For our long-term trades, we focused on fundamental factors such as:

  • Interest Rate Differentials: We analyzed differences in interest rates between countries to identify potential opportunities for carry trades, where we borrowed in low-interest currencies (e.g., JPY) and invested in higher-yielding currencies (e.g., AUD).
  • Economic Indicators: Key indicators, such as inflation rates, unemployment figures, and GDP growth, were monitored to predict currency movements. For instance, we predicted that rising inflation in the U.S. would lead to an appreciation of the U.S. dollar as the Federal Reserve would likely raise interest rates to combat inflation.
  • Political Risk: Political instability or elections in countries like the UK, the U.S., or Japan were factored into our long-term positions. For example, we anticipated that the ongoing uncertainty surrounding Brexit negotiations would lead to continued volatility in the GBP.

Carry Trade Example: JPY/AUD

One of our long-term strategies involved a carry trade using the JPY and AUD pairs. Japan's interest rates have remained near zero for years, making the yen an attractive funding currency for carry trades. Meanwhile, Australia’s relatively higher interest rates made the AUD a suitable currency to hold long-term.

In March 2023, we initiated a long position in AUD/JPY, anticipating that Australia's higher interest rates would generate positive returns. The carry trade yielded steady profits due to the interest rate differential between the two currencies, and the trade was held for several months. While the pair experienced short-term volatility, the overall trend remained favorable, and we exited the position with a gain of 120 pips.

Hedging Strategies

To mitigate the risks associated with long-term currency exposure, we employed hedging techniques using currency futures and options. For example, when we took a long position on the USD/JPY pair in anticipation of U.S. dollar appreciation, we also purchased a put option on USD/JPY to hedge against potential downside risk. This strategy protected us from significant losses if the U.S. dollar weakened unexpectedly.

6. Transactions Made: Secondary Objective

The transactions executed for our long-term strategy were based on predictions about macroeconomic factors, interest rates, and political developments. These trades involved larger positions held over extended periods, requiring patience and careful monitoring of economic indicators.

Example 1: USD/JPY Long Position

In April 2023, we initiated a long position on USD/JPY, anticipating that the U.S. dollar would appreciate due to the Federal Reserve's hawkish stance on interest rates. At the time, USD/JPY was trading at 131.20, and we entered a buy position with the expectation that higher U.S. interest rates would strengthen the dollar.

Over the next two months, the pair steadily appreciated, reaching a high of 135.50 in June. We closed the position at this level, locking in a gain of 430 pips. The trade was successful because we accurately predicted the Federal Reserve’s actions and their impact on the U.S. dollar.

Example 2: GBP/USD Short Position

In May 2023, we took a short position on GBP/USD based on concerns about the UK economy, particularly related to Brexit negotiations and slowing economic growth. The pair was trading at 1.2650, and we entered a sell position, predicting that the uncertainty surrounding Brexit would weaken the pound.

Our prediction proved correct, and by July 2023, the pair had fallen to 1.2400. We closed the position, securing a profit of 250 pips. This trade highlighted the importance of considering both economic and political factors in long-term trading decisions.

7. Profit and Loss Analysis: Secondary Objective

The long-term trading strategy yielded mixed results, with some trades generating significant profits while others underperformed due to unforeseen market events.

Successful Trade: USD/JPY Long

Our long position in USD/JPY was one of the most profitable trades in our long-term strategy. The trade yielded a gain of 430 pips, primarily driven by the Federal Reserve’s interest rate hikes and the resulting appreciation of the U.S. dollar. This success can be attributed to a well-timed entry and a strong understanding of the fundamental factors driving the market.

Loss Example: EUR/USD Long

One of our long-term trades that resulted in a loss was a long position on EUR/USD, initiated in February 2023. We anticipated that the euro would appreciate as the European Central Bank (ECB) signaled the end of its stimulus program. However, the trade moved against us due to unexpected economic challenges in the eurozone, including rising energy prices and political instability in Italy. The trade was closed with a loss of 200 pips.

This loss highlighted the risks associated with long-term trading, particularly when unexpected geopolitical events or economic shocks occur. Upon reflection, we recognized that we should have incorporated more diversified hedging strategies to mitigate this risk.

Overall Performance

While we experienced some losses, our long-term strategy ultimately generated positive returns, with an overall gain of approximately 450 pips across all trades. The use of fundamental analysis, combined with carry trades and hedging techniques, allowed us to capitalize on interest rate differentials and long-term economic trends.

8. Market Outlook Based on Stage 1

Our market outlook was heavily influenced by the individual market views developed in Stage 1 of the project. Each team member contributed their perspective on current and future market conditions, which helped shape our overall strategy.

U.S. Dollar Outlook

Several team members believed that the U.S. dollar would appreciate due to the Federal Reserve’s hawkish stance on interest rates and the strong U.S. economy. This outlook formed the basis of many of our long positions on USD pairs, such as USD/JPY and USD/EUR.

Euro Outlook

Other team members predicted that the euro would face challenges due to economic instability in the eurozone, particularly related to rising energy prices and political uncertainty in countries like Italy and Germany. This view influenced our decision to take short positions on EUR pairs, such as EUR/USD.

Japanese Yen Outlook

The Japanese yen was expected to remain weak due to the Bank of Japan’s commitment to maintaining near-zero interest rates. This outlook supported our decision to use the yen as a funding currency for carry trades, particularly in pairs like AUD/JPY and USD/JPY.

9. Speculation Strategy

In addition to our primary and secondary objectives, we also implemented a speculation strategy designed to take advantage of short-term market movements and volatility. This strategy involved higher-risk trades, where we sought to profit from rapid changes in exchange rates.

Leverage and Margin Trading

To amplify potential gains, we used leverage to increase the size of our positions. For example, when speculating on a sharp rise in the value of Bitcoin against the U.S. dollar, we used a 10:1 leverage ratio to magnify our profits. However, this also increased our exposure to risk, as losses were similarly magnified.

Cryptocurrency Speculation: BTC/USD

One speculative trade involved taking a long position in BTC/USD in May 2023. We anticipated that the growing interest in cryptocurrencies, combined with inflation concerns, would drive demand for Bitcoin as an alternative store of value. The pair was trading at $28,000, and we entered a long position with a target of $35,000.

Over the next two months, Bitcoin experienced significant volatility, reaching a high of $34,500 in July. We closed the position near this peak, locking in a substantial profit. This speculative trade demonstrated the potential for high returns but also highlighted the inherent risks of trading highly volatile assets like cryptocurrencies.

10. Trading Reflection

The overall trading experience provided valuable insights into both the opportunities and challenges of Forex trading. Each team member contributed unique perspectives, and together, we learned important lessons about market behavior, risk management, and decision-making.

Learning Outcomes

  • Short-Term Trading: We learned that short-term trading requires constant attention to market signals and news events. The ability to react quickly to market movements was crucial in capturing profits.
  • Long-Term Trading: Patience and a deep understanding of fundamental analysis were essential for long-term trades. While short-term volatility can create noise, long-term trends often prevail if the underlying economic conditions are well-understood.

Areas for Improvement

One area where we could have improved was our approach to geopolitical risk. While we accounted for some political developments, such as Brexit negotiations, we failed to fully anticipate the impact of certain events, such as the Russian invasion of Ukraine, which caused significant disruptions in the global Forex market.

Another area for improvement was our use of leverage. While leverage amplified our gains, it also increased our exposure to risk. In hindsight, we could have adopted a more conservative approach to leverage, particularly in highly volatile markets.

Conclusion

In conclusion, our team’s Forex trading strategy involved a combination of short-term and long-term techniques designed to achieve the client’s specific objectives. Through the use of technical analysis for short-term trades and fundamental analysis for long-term positions, we were able to generate positive returns while managing risk. However, the trading experience also highlighted areas where we could improve, particularly in terms of geopolitical risk management and the use of leverage.

The experience provided valuable insights into the determinants of foreign exchange rates, including the importance of interest rate differentials, economic indicators, and political developments. As we reflect on our performance, we are confident that the lessons learned will enhance our ability to develop more effective trading strategies in the future.

 

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